Central Authority, Local Elite Group and the Pace of Land Market Reform in China

Abstract

In China, policies formulated by the central authority are sometimes discounted in the implementation due to different local conditions. Since July 2007, leasing industrial land through negotiation was strictly prohibited by the central government, instead, market-oriented methods were encouraged. Using millions of the records of land transactions and the detailed information of industrial enterprises during 2007 to 2013, we find the increasing power of state-owned enterprises (SOEs) in local political economic ecosystem significantly lags the pace of land market reform. In precise, a city with 10% more share of workers in SOEs would have 1.67%-2.82% higher share of industrial leased by negotiation in the post-reform period, which further represses the price of industrial land and reduces the revenues from industrial land at 6.67% and 16.4% respectively. We confirm the results are caused by elite capture, that is, the reciprocity between local officials and local elite group- the state-owned enterprises. Apart from revealing the local government’s recalcitrance to central policy and potential corruption, we also show that a strengthened central authority under Xi’s governance would effectively mitigate the deviation from central directives in the locality.

Keywords: Central-Local Relation; Land Market; Elite Capture; State-Owned Enterprise; Xi’s Governance; China

JEL Classification: H77; P26